What's behind the jump in cotton futures?

“The market was very defensive on the opening yesterday,” said Memphis cotton merchant William B. Dunavant, Jr., who was interviewed on Friday.

“One part of the trade came in and bought a substantial number of contracts. Another part of the trade sold a substantial number of contracts 10-15 points above the previous night’s close and the market jumped to 45.10 cents,” said Dunavant. “That’s all it took. Then the speculators took over. They bought it and bought it and bought it.”

“I don’t think any part of the trade was anticipating a limit move at all,” said Texas A&M Extension economist Carl Anderson. “It caught everybody a little unaware. Then you get all the players on both sides, the users and the speculators covering and hedging their positions.”

Anderson and Dunavant says the move sets a new level of resistance for December at 49 cents and sets up USDA’s June 28 acreage report as a factor which could bring even more excitement to the market.

Two reports seemed to trigger the buying. One was a report about rainfall and flooding in China helped fuel ongoing speculation that China would become a significant buyer of U.S. cotton this year. However, actual damage to the crop is still unconfirmed at the time of this writing.

Still another report on cotton supply and demand indicated decreased world cotton production and carryover, and increased consumption.

On the other hand, too much cotton could continue to pressure cotton prices.

“I’d be surprised to see the market move above 49 cents in the next three or four weeks,” Dunavant said. “Now if something happens to the crop, yes it can. But the specs are probably getting close to 40 percent long now. So I think the market will settle down somewhat.”

Anderson says if cotton producers, “haven’t done any fixing of prices, this (the June 20 move) certainly gives them a new foothold to buy some out of the money puts for price insurance,” Anderson said. “That’s a simple way.”

For more sophisticated growers, “If you have a good contract, buy calls and then sell calls about six cents ahead of where they are. So if you contracted at 47 cents, I’d suggest buying a 48 cent call and selling a 54 cent call.”

Marketers now turn their attention to USDA’s June 28 acreage estimate. Anderson figures U.S. cotton acreage at 14.5 million to 14.7 million planted acres. “We’d be real surprised to see it at 14.3 million planted acres. That would be very supportive to this market. Then we could very possibly wear that 50-cent resistance down and go on to 52 cents.”

“We’re saying cotton acreage is going to be 14.5 million planted acres plus or minus a 100,000 acres,” Dunavant said. “But I think that’s already in the market.

Dunavant added that a planted acreage figure of 14.3 million acres, “would really get some people’s attention.”